Court Upholds FTC's Power to Sue Hacked Companies

A federal court rejects a bid from Wyndham Hotels to undercut federal authority over data security.

The Federal Trade Commission has the power to sue companies that fail to protect their customers' data, a federal court in New Jersey said Monday.

The ruling shoots down a challenge from Wyndham Hotels, which argued that the FTC overstepped its authority with a 2012 lawsuit against the global hotel chain.

The decision by U.S. District Court Judge Esther Salas is a major win for the agency. If the court had sided with Wyndham, it would have stripped the federal government of oversight of data security practices just as hackers begin to pull off more and more high-profile attacks.

Salas said her decision "does not give the FTC a blank check to sustain a lawsuit against every business that has been hacked," but that she must follow the "binding and persuasive precedent" to uphold the agency's authority.

The FTC is currently investigating Target over the massive hack last year that exposed information on 40 million credit cards. Target could have prevented the attack with better security practices, according to a recent report from the Senate Commerce Committee.

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The FTC has sued dozens of companies in recent years for failing to take reasonable steps to protect customer data. The agency says it has the authority to police data security practices because Congress gave it power over "unfair" business practices.

The FTC sued Wyndham in 2012, maintaining that the hotel chain didn't use basic security measures such as firewalls, complex passwords, or separating networks in different locations. As a result, hackers were able to penetrate a computer network in a Wyndham hotel in Phoenix and ultimately make off with information on 500,000 credit cards, the FTC charged.

Wyndham asked the federal court to throw out the suit, arguing that inadequate data security practices aren't "unfair" under the legal definition. The company also claimed the FTC should have published clear rules on data security before filing suit.

But Judge Salas said she wouldn't "carve out a data-security exception" to the FTC's power over unfair practices. She also concluded that the agency isn't required to spell-out specific data security rules.

Although the court dismissed Wyndham's attempt to block the suit, the FTC will still have to prove the charges.

FTC Chairwoman Edith Ramirez said she's "pleased" with the decision and looks forward to trying the case against Wyndham.

"Companies should take reasonable steps to secure sensitive consumer information," she said. "When they do not, it is not only appropriate but critical that the FTC take action on behalf of consumers."

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Michael Valentino, a Wyndham spokesman, noted that the decision is limited to the FTC's power and does not address whether Wyndham broke the law.

"We continue to believe the FTC lacks the authority to pursue this type of case against American businesses, and has failed to publish any regulations that would give such businesses fair notice of any proposed standards for data security," he said. "We intend to defend our position vigorously."

Michael Valentino, a Wyndham spokesman, noted that the decision is limited to the FTC's power and does not address whether Wyndham broke the law.

"We continue to believe the FTC lacks the authority to pursue this type of case against American businesses, and has failed to publish any regulations that would give such businesses fair notice of any proposed standards for data security," he said. "We intend to defend our position vigorously."

Although the FTC can order companies to change their business practices, the agency has no fining authority. Democrats are pushing several bills in Congress that would expand the FTC's authority over data security, including give the agency the power to fine companies for noncompliance.